Straight article offers clue why bankers want higher down payments and shorter amortization periods

Today, the Globe and Mail carried curious story on the front page above the fold, which is the most prized position in any daily newspaper.

The headline stated: "Big Six banks urge Ottawa to tighten mortgage rules".

An unnamed source quoted in the article suggested that the bankers would be happy with upping the minimum down payment from five percent to 10 percent, and shortening the maximum amortization period from 35 years to 30 years.

The piece made it appear that a bunch of benevolent bankers were troubled by the prospect of a housing bubble, and wanted to make it more difficult for some Canadians to borrow money to buy a home.

Why would they do that if they're profiting from all this lending?

Perhaps an article in the Georgia Straight last week might provide a clue. New Westminster chartered accountant Elbert Paul noted that the Office of the Superintendent of Financial Institutions is requiring federally regulated entities, such as banks, to conform to international financial reporting standards.

In the past, securitized Canada Mortgage and Housing Corporation mortgages were not required to be reported on the balance sheets of the banks. That changed on January 1.

The banks don't make as much money on these products as on other financial instruments, according to Paul, who questions the wisdom of the OSFI's new rule.

“Many financial institutions will have no choice but to exit CMHC securitization entirely as revenues from this low risk insured product will be significantly less favourable than from other products,” Paul wrote in a December 10 letter to Finance Minister Jim Flaherty. “This is because CMHC securitization product will be weighted the same way as any other asset.”

In other words, the advantage that CMHC securitization has provided in the past—in that they were never included in the calculation—will now be taken away.

Perhaps the Big Six banks want the feds to legislate shorter amortization periods and higher minimum down payments so they don't have to deal with pesky CMHC-insured mortgages, which don't generate as much revenue as other lending. And to hell with first-time buyers who might want to enter the home-ownership market.

An added bonus for the banks? It would make it even harder for credit unions, which rely heavily on mortgages,  to compete with them.

It's too bad Parliament isn't sitting so that Opposition MPs can ask questions about this.




Feb 7, 2010 at 10:31am

It used to be that the common person could buy a home in 25 years. Now young people have to mortgage there future for 35 years.
Part of the problem is that home prices have sky rocketed. Loose lending, 40 year amortizations and zero down were and are helping to generate
more demand. If the government had kept the maximum amortization at 25 years prices would have slowed and new home owners would not have to slug it out over 35 years.
Lets not follow the states into the quagmire.


Feb 7, 2010 at 11:04am

Securitized debt obligations, or SDOs, were a key failure point in the American and international financial systems that brought about the 2008 financial crisis and ensuing world recession. It had been theorized by rating agency specialists that these structured obligations could take high risk debt and turn it into more reliable financial instruments. Various "tranches" would be paid under certain conditions, with the top tier being paid first, and therefore enjoying more security and a better return. These top tier SDOs would become AAA debt, as if by some kind of alchemy.

It worked in theory as long as the original debts in the field, mostly the household sector, things like mortgages and credit cards, were not all failing in a combined or correlated fashion. Once failures became correlated financial institutions which held these obligations became threatened simultaneously, leading to the dissolution of Wall Street companies of great size and reputation and long history.

In the final anlysis, if the original debts in the field are of questionable reliabilty, so too is any structure built upon them.

The Bank of Canada has maintained that because Canadian mortgages were more always much more conservative to begin with there is little chance of a housing market meltdown in this country similar to what happened in the US with the sub-prime mortgages. Perhaps they are right. However, I think there may be some wishful thinking there.

If people find they are making payments on a mortgage that represents more than the sale value of the property, and they face other difficulties such as job loss or marriage breakup, the temptation to walk away and drop the keys on the banker's desk could become irresistable, as it did for some people in the late 1970s.

In a highly inflated market like much of BC a price drop of 15 or 20 percent, if sustained for a year or two, could lead to significant defaults. Banks wouldn't like this, obviously, but why would credit unions which are more dependent on household borrowing than banks?

Also, one needs to ask about the basic advisability of 30 year and longer mortgages. What sense does it make to finance an asset, which is in part a construction product, over a term that is longer than its major maintenance and upkeep schedule? How do owners finance major emergency repairs like leaky condos, or simply routine roof repalcement on a house, if all their borrowing power has already been spoken for with the initial purchase?

In Vancouver concerns like that are traditionally overlooked since it's assumed, not without some justice, that the real asset the buyer is interested in is the land value. And the second assumption is that this will always and forever be rising significant in price, no matter what, because this is Vancouver. The important policy consideration is then said to be to keep access to those a share of those capital gains as open and widespread as possible. The reason given is that we don't want to close the door on the next generation getting a piece of the same real estate action their parents are celebrating. One wonders if the real reason isn't to secure the parents' and their agents' gains by preventing any major break in the upward march of prices, granting the marketeers access to another generation of first-time buyers at the base of the pyramid.

Rod Smelser

Michael K

Feb 7, 2010 at 1:07pm

"And to hell with first-time buyers who might want to enter the home-ownership market."

Considering the income to cost ratio on housing I say: That would only be good for first-time buyers who have to wait a bit longer until they are financially in a better shape to buy.

The sooner this fable of "you need to buy to build equity" story ends, the better for the whole country.